Revival in residential realty to be gradual: CRISIL Ratings

Cash-flow support from commercial portfolio to continue in the near term

An improvement in end-user participation on rising affordability, increasing launch of units with mid-income ticket sizes, and implementation of the Real Estate (Regulation and Development) Act, 2016, or RERA, is expected to revive demand for residential real estate in the medium term. Resolution of the recent NBFC liquidity issues, however, would be key for the same.

Affordability, calculated as the ratio of the property cost to annual household income, is expected to come closer to the ideal band given a moderate income growth estimated for mid-income households. As of fiscal 2019, affordability in most cities is estimated to be in the range of 6-8 times compared with 11-13 times five years back.
Ticket sizes have been coming down as developers launch units with reduced average area per house, led by both market needs and the impetus to affordable housing. As such, capital values in the residential segment have been under pressure of late – with a decline of 5-20% across micro markets in the last 2-3 years – and are likely to remain range-bound because of unsold inventory.

Implementation of RERA, is also expected to give a fillip to demand, which has been lacklustre so far. With most RERA websites operational and a grievance-handling mechanism in place in key states, end-user participation is expected to improve gradually for under-construction properties as well.

In the short term, demand is likely to remain muted and prices will remain under pressure on account of slowdown in volumes due to on-going liquidity concerns.

Says Rahul Prithiani, Director, CRISIL Research, “Between fiscals 2019 and 2021, residential demand is estimated to log a compound annual growth rate of ~4% led by key micro markets of Bengaluru, Hyderabad and MMR. Though marginal, the growth will be driven by first time buyers eyeing units in midincome tickets typically priced between Rs 2.5 mn to Rs 10 mn.”

Meanwhile, the commercial portfolio is seeing steady lease rentals and healthy demand. Indeed, even as investor interest in the residential segment has been fading due to limited property price appreciation and inability to monetise the assets, commercial real estate is becoming a hub for new investments.

The commercial segment has also seen a good number of assets changing hands. With large private equity firms and property managers on the prowl, just 15 of the larger marque deals over the last five fiscals have totalled around Rs 30,000 crore.

This has helped cushion the blow for developers who have been refinancing and taking on more debt for construction as residential demand remains tepid. With limited incremental funding to the sector from banks, which grew at just 2% in fiscal 2018, NBFCs and HFCs came to the developers’ rescue. However, given the current pressure on liquidity for NBFCs, a potential cascading effect on select projects and developers, could make access to funding more difficult for them. Developers with a portfolio of commercial assets have been able to manage their liquidity better and are expected to continue to do so.

For the top 20 developers alone, support extended to the residential segment from their commercial portfolio has totalled around Rs 33,000 crore in the last three years, both through sale of assets and additional top-up debt in operational properties. These developers account for 90% of the market capitalisation in the real estate sector and have more than 650 million square feet under development.

Says Sushmita Majumdar, Director, CRISIL Ratings, “With demand recovery in the residential segment expected to remain muted, and the current liquidity issues in the NBFC/HFC space, additional leveraging of lease rentals and asset sales will continue to dominate cash flow support from commercial to residential
segment in the near term. Real estate investment trusts, or REITs, could be another way to help developers deleverage, and the success of the first REIT will set the tempo on this option.”

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